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Which Is The Fastest-Growing Bank In Puerto Rico?
One Financial Institution In Puerto Rico Has Boosted Loan Production By 170%, Raised Credit Limits By 230%, Slashed Loan Delinquency By 40%, And Introduced Hot New Products For Local Small And Medium-Size Businesses. Youll Never Guess Which One!
By KEN OLIVER-MENDEZ
June 12, 2003
The new, agile EDB: Among the many changes, loans are now processed in weeks instead of months.
During the past year, Puerto Ricos small and midsize businesses have been witness to a transformation at the Economic Development Bank (EDB).
Since July 2002, the EDB has more than doubled its loan production compared with the previous year, raised its loan ceiling from $1.5 million to $5 million, considerably stepped up joint financing projects with the islands commercial banks, and added hot new loan products such as an interest reimbursement incentive tied to a business job creation and retention record.
For the first time ever, the bank has also added credit card products (one tailor-made to farmers and one for all other business clients), launched a new Tourism Guarantee Fund designed to support the growth of small and midsize tourism businesses, and reduced its chronic loan delinquency rate from 44.8% in April 2002 to 25.8% in April 2003.
Loans are now routinely processed in weeksnot monthsand the bank is in a position to boost its loan portfolio from the current $150 million to as high as $400 to $500 million. A new marketing culture now characterizes the bank, including major enhancements to its website.
Driving a turnaround
All of the above accomplishmentsand then somehave occurred since Antonio Faria took the helm of the bank one year ago this month.
Faria himself, however, is the first to insist that the turnaround at the EDB is a team effort. "None of the results weve had so far could have been possible without the support of the 176 employees who work and are dedicated to the mission of this bank," said Faria.
As president, Faria moved quickly to implement a new marketing culture at the bank and to instill a new sense of esprit de corps among employees.
Shortly after assuming the presidency of the institution, the highly regarded 30-year banking industry veteran recruited Francisco Rodriguez Castro, the former Oriental Group vice president for commercial lending, to be the EDBs new executive vice president for business development. Faria had mentored Rodriguez Castro when they worked together during the late 1980s and mid-1990s as executive vice president and assistant vice president, respectively, at the Banco Central Hispano.
"One of the first things Paco and I sat down to do was to change the names of our loan products," recalled Faria in an interview last week. "The names of EDB loans sounded like bureaucratic government programs."
For example, pre-Faria, the EDB loan geared toward labor-intensive firms was called "The Hands in Action Program" and the loan designed for financing electrical generators and cisterns was "The Emergency Equipment Acquisition Program." The names were simplified to "Bandesarrollo Crediempleo" and "Bandesarrollo Emergencia."
The changes werent just cosmetic, however. Faria and his team also raised the loan ceiling from $1.5 million to $5 million and began reaching out to the commercial banking community by offering to share risk and participate in big financing deals.
"I wanted them [the commercial banks] to understand that the EDB is here to work with them and to act quickly when theyre interested in the EDBs participation in a deal," Faria said. He noted that the EDB is a natural collaborator of commercial banks and isnt considered a threat since it doesnt take deposits from clients.
According to Francisco Rodriguez Castro, one of the other major impediments to a greater risk-sharing role with commercial banks, besides the low loan ceiling, was the EDBs slow response to loan applications. "The perception out there was that the EDB was too slow, taking four months to approve a loan," said Rodriguez Castro.
Thats no longer the case, as Faria and Rodriguez Castro have made rapid responses to their current bevy of commercial banking partners, among them Banco Popular, Banco Santander Puerto Rico, BBVA Puerto Rico, Citibank of Puerto Rico, FirstBank, and R-G Premier Bank, a given.
Faria said loan applications to the EDB are now processed in as little as a week. The average is three or four weeks, with loans being disbursed an average of three weeks later. The EDB has been involved in several major financing deals with local commercial banks, including a $5 million share in a refinancing and capital improvements package for Supermercados Grande. BBVA, Citibank, and R-G Premier Bank are all also involved in the deal, which is designed to help the last locally owned supermarket chain upgrade stores and strengthen its competitive position.
As can be seen in the Grande financing deal, the bank now also serves some of the islands biggest businesses in addition to its core small- and midsize-business clientele. The EDB uses the U.S. Small Business Administrations definition of small and midsize businesses, meaning those with 500 or fewer employees.
Earlier this year, the EDB also had a $5 million share in financing the recently inaugurated Rincon of the Seas Hotel & Resort, and provided a $3 million loan package for the Villas de Sotomayor parador in Adjuntas.
The EDB has participated in several other multimillion-dollar deals in conjunction with commercial banks, such as those made with egg producer Productos Huevos De Aqui in Aguas Buenas and circuit-board manufacturer PCB Horizon in San German.
During the first 11 months of fiscal year 2003 (July 2002 through May 2003), the EDB approved more than $105 million in loans, up 170% in comparison with the entire previous fiscal year.
One of the major drivers of that growth was the development and implementation of an innovative new interest-reimbursement program. In collaboration with the Office of the Commissioner of Municipal Affairs (OCAM by its Spanish acronym), the EDB uses U.S. Housing & Urban Development Community Block Development Grant (CBDG) funds to reimburse businesses part of the interest payments that they make on qualified EDB loans.
Of the islands 78 municipalities, 57 participate in the program through OCAM. Most of the remaining 21 municipalities have signed agreements with the EDB to enable their business clients to benefit from the program.
"As of May 30, we have made $31.8 million in loans tied to this program, and weve already given back $773,000 in reimbursements to businesses throughout the island," said Rodriguez Castro.
Duly registered EDB clients in participating municipalities are entitled to a reimbursement of 25% of the interest payments on their loans if they are self-employed or employ up to three persons. The reimbursement rises to 50% for businesses with four to eight employees, and a maximum reimbursement of 75% applies to businesses with nine or more employees.
The impact is significant. For example, an EDB client with nine or more employees and a 6% loan ends up paying an effective interest rate of 1.5%.
The reimbursement incentive is offered during the first three years of a loan or during the first third of the loans life, whichever is shorter. In order to implement the program, the EDB has trained 105 employees in the economic and federal affairs areas of municipal governments throughout the island. "I call them my new bank officials," said Rodriguez Castro. "They come out of the training ready to generate business."
Agricultural businesses accounted for 36% of the loans approved in the past 11 months, followed by the manufacturing (24%), services (16%), and commerce (14%) industries.
"Loans in the $50,000 to $200,000 range are the bread and butter of our business," said Faria.
The banks Agriculture Guarantees Fund, launched in 2002, provided $19.6 million in direct loan guarantees in the first 10 months of fiscal year 2003. The bank also recently launched a credit card for clients in the agriculture industry. There were 276 cardholders as of April 30.
Credit cards. . .and beyond
In February, the bank launched "Credito Empresarial," a credit card for all its current and potential business clients. "This card has the advantage of putting a fast and flexible financing alternative into our clients hands," said Faria.
The next initiative, which is currently in the works and scheduled for availability within the next three months, is a debit card for EDB clients. "Well be the only bank in Puerto Rico that offers the alternative of disbursing its loans to clients through debit cards," said Rodriguez Castro.
Faria pointed out that the EDBs debit card would also offer the advantage of eliminating checks and making the banks disbursement process even faster.
The banks e-marketing and online services have also been substantially enhanced. In November 2002, the EDB website was completely revamped to reflect the banks new proactive and user-friendly image. In addition to accessing loan applications, clients can tap into the websites orientation modules on developing business plans and other useful information. The banks new calendar of free continuing education seminars for local businesspeople-developed in collaboration with entities such as the Puerto Rico Chamber of Commerce and the United Retailers Associationis also featured on the site.
The banks most recent initiative is a joint effort with the Puerto Rico Tourism Co. to establish a Tourism Guarantee Fund (TGF). The full range of tourism businesses, including hotels, paradores, restaurants, tour operators, and transportation services providers, are now able to turn to the EDB for this loan guarantee mechanism.
"Up until now, only the big hotels were able to get such backing," said Faria. The TGF was used as a component of the recent $5 million loan to Villas de Sotomayor in Adjuntas, and Faria said he expects the TGF to help strengthen the islands small and midsize hotels as well as related tourism interests.
Overcoming a roadblock
The only area where the institution has been stalled, Faria acknowledged, is in winning House passage of the Calderon administrations bill to make the EDB a subsidiary of the Government Development Bank (GDB).
Though the bill passed the Senate unanimously, House leaders have halted the bill amid concerns the EDB might be hamstrung by its absorption into the GDB. According to Faria, the real effect of the EDBs integration into the GDB would be quite the contrary.
"Were not going to be like other GDB subsidiaries," Faria said. "Were going to become a subsidiary of the GDB through the enactment of our own law."
Moreover, Faria emphasized how becoming a GDB subsidiary would enable the EDB to benefit from the GDBs credit rating. "Right now, our funding is renewed every 40 to 50 days," Faria said. "As a subsidiary of the GDB, we would have more attractive longer-term options such as capital notes and commercial paper issues, as well as other funding products."
Faria said hes confident the integration of the EDB as a GDB subsidiary would win approval by the end of the year.
Reducing the delinquency rate
Though the EDB is destined by the very nature of its mission to take more risk than any other financial institution in Puerto Rico, Faria said the banks loan delinquency rate when he took office was unacceptably high, at more than 40%.
Since last July, however, the bank has been making a concerted effort to tackle the problem. Faria himself chairs the loan delinquency committee, which meets every week without fail.
To help them make progress, Faria and Rodriguez Castro hired Emilio Hernandez. "Emilio is a soft-spoken guy with a persuasive approach," said Rodriguez Castro. "The bottom line is he wont take no for an answer."
Faria said the approach of the delinquency committee is firm but flexible in terms of working out a payment plan. "But if you try to be smart and have money but arent paying, Im going after you," he declared.
As a result, the delinquency rate has fallen from 44.8% in April 2002 to 25.8% in April 2003. "My goal is to get it down to 12% to 15%," Faria said. Some $3.2 million in delinquent loan payments were recovered during the first 10 months of the current fiscal year, compared with $1.4 million during the same period in fiscal year 2002.
The feverish activity to both build the loan portfolio and reduce loan delinquencies is the result of Farias mandate to ensure that the bankfor the first time evermakes most of its income from loans.
For the greater part of the EDBs 18-year history, Internal Revenue Code Section 936 deposits (936 funds) were the basis for most of the banks funding and income. With that source being phased out by 2005, the bank no longer has the luxury of sitting back and getting cheap funding, reinvesting it for income, and then letting an inordinate number of delinquent loans accumulate.
As Faria sees it, the comfortable situation in the past was actually a disincentive for bank officials to dedicate themselves to stimulating investment and expansion activity among island businesses. With no other option and the pressure on, Faria said he and his team are determined to do so now.
Given the banks capital of more than $107 million, Faria said the EDB could boost its loan portfolio from the current $150 million to as high as $400 million to $500 million and still retain its standing as a well-capitalized institution.
Antonio Faria: A banker at the top of his game
Antonio Faria assumed the presidency of the EDB in June 2002. He has brought to the bank over 30 years of experienceat some of the highest levelsin Puerto Ricos commercial banking and brokerage industries.
His career started at Citibank, where he rose from executive trainee and branch manager to manager of corporate banking. At the latter post, he was responsible for establishing Citibanks financial institutions financing division.
In 1978, Faria moved to the former Banco Central y Economias, where he was responsible for organizing the corporate banking area. In 1994, he was named executive vice president of Banco Central Hispano, where he also served as the institutions senior lending officer and chief operating officer.
From 1998 to January 2001, Faria served as executive vice president and chief operating officer of PaineWebber Trust Co. of Puerto Rico. He also was senior vice president of PaineWebber Inc. of Puerto Ricos investment banking group.
In January 2001, Gov. Calderon appointed him Commissioner of Financial Institutions. Faria holds a bachelors degree in business administration from Pontifical Catholic University of Ponce and a masters degree in finance from Inter American University.
This Caribbean Business article appears courtesy of Casiano Communications.